Airbus reportedly set for more A380 delays

First deliveries could be postponed by six more months, paper reports

By

AudeLagorce

LONDON (MarketWatch) -- European aircraft maker Airbus is poised to announce new delays in deliveries of its A380 superjumbo aircraft in the next few days, a French newspaper reported on Wednesday, without citing sources.

Les Echos reported that Airbus is likely to unveil a delay of at least six months for its first deliveries to customers such as Air France
AKH, +42.86%
(003112), Singapore Airlines and Emirates.

The paper reported that EADS management met on Monday to set out the postponed delivery schedule, which could be announced before an EADS board meeting on Sept 29. Only four planes could be delivered next year, instead of the nine announced in June.

Airbus is 80% owned by European defense company EADS, with the other 20% held by the U.K. defense contractor BAE Systems (BA).

"According to our information, the assembly problems at the Toulouse-Blagnac plant would not allow it (Airbus) to hold to its last pledge of delivering at least nine aircraft in 2007 (against 25 initially planned)," the newspaper reported.

An Air France spokesman said the airline had been informed of a "new delivery schedule," suggesting Airbus may be in the process of lowering the expectations of its key customers once again.

Airbus has been in turmoil since June 14, when news of a fresh round of delays with the A380 sent its stock down 26% in a single day. The news also brought allegations of insider trading and sparked the departure of Co-CEO Noel Forgeard and Airbus Chief Gustav Humbert.

When Christian Streiff took over at the helm of Airbus following Humbert's resignation at the beginning of July, he gave himself 100 days to conduct an in-depth review of the group's programs. Airbus customers and shareholders are expecting an update shortly.

The signs, however, are not encouraging. One of Streiff's first decisions was to replace the head of the A380 program, Charles Champion, with Mario Heinen, who previously lead the single-aisle program, thereby suggesting top management had lost confidence in Champion.

The first indications of potential new delays emerged last week when the Wall Street Journal cited BAE Systems Chief Executive Mike Turner as saying all the ingredients were in place for further turbulence at the plane maker.

Turner also said on a call with journalists following BAE's first-half results last week that he wouldn't be surprised if there was a call on shareholders to invest cash in Airbus. See archived story.

BAE wants to sell its 20% holding to co-parent EADS. The board of BAE Systems is advising its shareholders to approve the sale at a meeting on Oct. 4, though the agreed price is lower than initially expected.

The financial impact

Deutsche Bank analysts told clients that a further six-month setback for the A380 could cut an additional 200 million ($254 million) to 250 million euros from Airbus EBIT forecasts in 2007 and 2008, on top of the 500 million-euro annual impact already announced in June.

"This would represent a 10% downgrade to our 2007 and 2008 Airbus EBIT forecasts and a 6% to 7% downgrade to group EBIT forecasts," the broker said.

Deutsche Bank added that the delays "will lead to additional penalty payments to airline customers to compensate further for late deliveries."

The A380's woes mainly stem from electrical wiring problems and have sparked calls for compensation from customers, some of whom have hinted they might reconsider their orders.

Emirates is by far the largest customer for the $300 million plane, with 43 orders. A spokesman for the company on Wednesday said the carrier still expects its first delivery of the aircraft in October 2007.

Meanwhile Singapore Airlines, another large A380 customer, recently changed its slogan to "First to fly the A380 in 2006" to "First to fly the A380."

The clouds gathering around EADS prompted French broker Ixis Securities on Wednesday to cut its rating to sell from hold, saying the company is facing a difficult autumn.

Russian rebuff

As if Airbus needed any more slaps in the face, Russian flagship carrier Aeroflot also on Wednesday said, following weeks of deliberation, it will buy planes from both Boeing
BA, +0.72%
and Airbus to renew its ageing fleet. Aeroflot said it will buy 22 Boeing jetliners in the 2010-2012 period, and the same number of Airbus aircraft in 2012-2016.

The decision to split the order between the two rivals comes hard on the heels of a rebuff by EADS to Russia's purchase of a 5.02% stake in the company.

On Sept. 15, Arnaud Lagardere and Manfred Bischoff, the co-chairmen of EADS, said it wouldn't be in the interests of the company to enlarge the group of its key industrial shareholders. The statement came in response to comments from the Kremlin suggesting Russian state-controlled bank OAO Vneshtorgbank, or VTB, intended to build up its stake in the company and seek a blocking minority. See archived story.

A built up Russia stake in EADS could pose additional problems for the company, which is in competition for a $20 billion-plus refueling tanker order from the U.S. Department of Defense. Observers noted that the Pentagon would balk at ordering military aircraft from a company even partly owned by Russians. See more global markets coverage.

"There's no way that the U.S. would give that contract to EADS if the Russians get on board," said Doug McVitie, an analyst with consultancy Arran Aerospace.

"Airbus is just in such a bad spot right now. The shares recovered after the June warning because of all the promises of good news. But there is no good news really. They are just focused on putting out fires at the moment," he said.

Financial analysts said the potential production delays rather than the Aeroflot news were weighing on the EADS shares.

Talking about the share move, Peter Kysel, head of European equities at MFC Global Investment Management said: "It's an ongoing issue about the apparent production difficulties. It's very much about the production and shows how incredibly complex these modern planes are, and how difficult it is to make sure that it's going to happen on time."

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